Cooperatives: A Tool for Community Economic Development
INTRODUCTION TO COOPERATIVES
|THIS CHAPTER outlines the basic information you need to know about
what they are;
what they can do for your community;
benefits to co-op members;
co-ops’ abilities to achieve economic goals;
historical significance of co-ops;
how co-ops are like other business models;
how co-ops differ from other business models; and
different types of co-ops and sectors in which they operate.
BIRTH OF A COOPERATIVE
IN THE LATE 1980s Wisconsin’s dairy farmers were facing more of what
they’d already seen too much of: falling milk prices, rising operational
costs and fewer economic choices. Hardly a farmer out there didn’t
know several of his kind who had gone out of business due to these factors.
A small group of organic dairy farmers in the southwestern part of Wisconsin
decided to take some control over the processing and marketing of their
milk. They felt that forming a cooperative was the only way they could
survive in the chaotic farm economy.
Today their cooperative (CROPP) has 160 farm family members throughout
Wisconsin and the upper Midwest. It produes a wide variety of dairy
products, including 20 kinds of cheese, ice cream, butter, yogurt, half
and half, and fluid milk in addition to marketing eggs and vegetables.
Headquartered in La Farge, CROPP is the largest organic dairy co-op
in the United States, and is planning to double its production over the
next few years
|As governments around the world cut services and withdraw from regulating
markets, cooperatives are being considered useful mechanisms to manage
risk for members and keep markets efficient.
Why do people start cooperatives?
For over 150 years, cooperatives have been an effective way
for people to exert control over their economic livelihoods. As the
story above illustrates, cooperatives continue to have a powerful impact
on Wisconsin’s economy.
Today, in an era when many people feel powerless to change their lives,
co-ops represent a strong, vibrant, and viable economic alternative.
Co-ops are formed to meet peoples’ mutual needs. They are based
on the powerful idea that together, a group of people can achieve goals
that none of them could achieve alone.
There is a rich history of cooperation in our state and country.
In Wisconsin, 2.7 million residents (more than half the population) are
served in some way by cooperatives.
Cooperatives in the U.S. play a vital role in the economy. Over
47,000 cooperative businesses generate $100 billion in economic activity.
Nearly 40% of the U.S. population participates in some kind of cooperative.
Cooperatives have been used to address a wide variety of economic conditions
and meet diverse challenges.
WISCONSIN’S FIRST DAIRY COOPERATIVE was started in 1841 by Anne Pickett.
She pooled milk from her neighbors’ farms to make cheese, and shared the
profits with all the farmers involved.
RURAL ELECTRIC COOPERATIVES were started by farmers in the 1930s to obtain
electric services when private utility companies refused to serve rural
COOPERATIVE INSURANCE SOCIETIES were formed in America in the late 1700s,
enabling working people to obtain fire insurance at prices they could afford.
CREDIT UNIONS, or financial cooperatives, were organized in the early 1900s
to provide access for working people to saving accounts and credit.
|Successful cooperatives are formed to solve problems and seize economic
North Dakota Assn. of
Rural Electric Co-ops
What exactly is a cooperative?
A cooperative is a business that is owned and controlled by the people
who use it. Its primary purpose is to provide goods and/or services
to its members for their mutual benefit.
Cooperatives provide a unique tool for achieving economic goals in an
increasingly competitive global economy. These goals may include:
Cooperation is most effective under economic conditions which respond to
group action. For example, when individuals acting alone can’t achieve
sufficient economy of size to compete in the marketplace, pooling their
resources and marketing together can be an effective strategy. Or
there may be other barriers to market entry, a lack of sufficient capital,
or an imbalance of market power which individuals alone can’t effectively
address. Cooperatives enable groups of people to achieve goals
which are only possible through joint effort.
Achieving economy of size;
Increasing bargaining power;
Sharing costs of new technology;
Adding value to agricultural products;
Gaining access to new markets;
Reducing risks associated with new enterprises;
Obtaining new services;
Purchasing in bulk to achieve lower prices; and
Securing credit from financial institutions.
In addition to the direct benefits they provide to members, co-ops strengthen
the communities in which they operate. Many co-ops provide jobs and
pay local taxes because they operate in specific geographical regions.
The co-op’s financial benefits to members, including patronage refunds,
provide an economic boost to the community as well.
It is important to note, however, that forming a cooperative is not
a guarantee for success. Co-ops are subject to the same marketplace
demands and planning requirements as any business, including
A co-op must not only meet its members’ needs, but survive in the marketplace
while doing so.
careful market analysis;
sound business planning;
competent management; and
adequate capital to start-up and grow.
How do co-ops differ from other businesses?
Like other businesses, cooperatives start with the recognition of a
need or an opportunity. In fact, the economic motivation for starting
a co-op is very much the same as for starting other businesses.
Cooperatives also operate very much like other businesses. They
must serve a market efficiently and effectively, they must be well managed,
and they must survive financially.
However, there are important distinctions that make co-ops unique.
The principal ones are:
These distinctions mean co-ops differ from investor-oriented firms (IOF)
in significant ways. Each investor in an IOF has control over the
firm only to the extent to which s/he has invested capital in it, and receives
profits from it on the same basis.
Members own their co-ops.
As owners, they provide the capital necessary for start-up and
growth of the business.
Members control their co-ops.
Each member usually gets one vote, regard less of the amount of equity
they have invested in the co-op. The board of directors is elected
by the membership.
Members benefit from their co-ops.
Profits are distributed to the members in proportion to each member’s
use of the co-op.
The owners of IOF’s may never even use the products or services their
company produces. In fact, many IOF’s are capitalized by investors
whose primary motivation is obtaining the greatest return on their investment.
In contrast, the member/owners of a cooperative are the primary users
of its products and services. Co-op members want to generate the
highest possible returns on their investment as well, but they do it by
addressing their common problem.
The chart that follows helps distinguish between different types of
business organizations, including co-ops. It was developed by the
University of Wisconsin Center for Cooperatives.
Comparison of Business Forms1
The University of Wisconsin Center for Cooperatives,
University of Wisconsin-Extension, February 1998
You're the Boss.
Sole proprietors often invest in other businesses to acquire
goods, services, access to markets, and/or profits which they cannot acquire
Pass-through income taxation.3
Appreciated assets can be distributed back to orignial owners
without recognizing gains.
At least one partner must shoulder unlimited liability.
There appears to be few good reasons to choose a partnership
over an LLC.
|Limited Liability Company (LLC)
Same advantage as partnership, PLUS:
Limited liability for all members.
Not so well suited for large(+10) numbers of owners or when
ownership continually changes hands.
Most appropriate for "close-held" joint ventures (involving
two to ten owners) with relatively stable ownership (slow turnover)
Open to any and all investors.
Very flexible to reward capital investment.
Both individual owners and the corporate entity are taxed
(i.e., double taxation).
Designed to maximize profits for investors. One share, one
vote. Best model for securing capital.
Open to any investors, up to a limit of 75.
A limit to one class of stock prevents varied allocations
of profits to different investors.
Limit to 75 shareholders.
May be appropriate if: the business has between 10 and 75
owners; there is regular turnover of ownership; a single class of stock
is sufficient; and not all investors "use" the business.
Control of the business is kept in the hands of those who
"use" its goods and services.4
Most profits, if there are any, are returned to members in
proportion to their "use" of the business.
Pass through taxation for all profits that are distribution
to members in proportion to use.
Investment limited mainly to those who "use" the co-op's
goods and services, thereby restricting access to capital.5
Decision-making can be slowed by democratic process.
Added costs for communication and member education.
When numerous individuals or businesses agree on a long-term
strategy to meet a common need or pursue an opportunity, a cooperative
can utilize member investments to puruse that strategy through marketplace
Desinged to serve members. Profits distributed in proportion
to use. One person, one vote.
||Can qualify for grants, donations, and other subsidies.
Can avoid income taxation entirely.
|Not appropriate if the organization's annual surplus
or profit is to be distributed to members.
||Even if profits are not generated, the "control structure"
of cooperatives may be more appropriate if an organization's mission is
to sell goods and services to its own members at cost.
1The best choice of business structure will
vary from situation to situation. Sometimes, a combination of two or more
business forms is recommended. This chart is offered only as a basic introduction.
It is strongly recommended that individuals consult legal and financial
professionals before selecting a business form.
2This means that the owner risks not only
the money invested in the company, but all personal assets are places at
3Sometims referred to as single(va. double)
taxation, pass-through taxation means that the individual owners (partners
and members) pay income tax on profits, but the joint entity does not.
"Double" taxation", when both owners and the joint entity pay income taxes
on profits, occurs in C Cooperations, and in limited circumstances in S
and Cooperative Cooperations.
4There are many ways that member can "use"
a cooperative: to acquire goods and services; to produce value-added products
for sale; etc. This use is measured (in dollars spent, in hours worked,
in bushels processed, etc) and the profits generated by the cooperative
are returned to members in an "equitable" fashion -- i.e., in proportion
5Acutally, "outsiders' or non-users can invest
in a cooperative, but by alw their law their return on investment is limited
to 8%. This limit also restricts access to capital.
|Co-ops are formed for a wide range of reasons to enhance the economic
and social well-being of members
What are the different types of cooperatives?
The cooperative form is highly flexible and adaptable. Several different
types of cooperatives exist, each performing a different function.
Co-ops also operate in a variety of industries.
Given all these factors, different ways of categorizing cooperatives
have been developed. This Manual and the Cooperative Development
Conference which it accompanies use the following categories:
AGRICULTURAL CO-OPS include producer, farm supply, and new generation
co-ops. These co-ops are formed by farmers and other producers to
process and market their products (including agricultural goods, crafts
and manufactured products) or to provide supplies needed for their farms
and businesses. During the last decade, a movement toward value-added,
new generation agricultural co-ops has swelled throughout the upper
CONSUMER CO-OPS are formed to buy groceries, financial services,
and many other goods and services. Examples include retail food co-ops
and credit unions.
BUSINESS CO-OPS are formed by a group of businesses or organizations
in order to purchase supplies or services in bulk. Examples include
wholesalers owned by retail hardware stores and grocery stores.
WORKER CO-OPS are owned by the employees who work in them.
Another form of worker ownership is the Employee Stock Ownership Plan (ESOP).
The cooperative form of business has been in use for more than 150 years.
In 1995 the International Cooperative Alliance adopted the following
set of principles which are intended to articulate guidelines by which
cooperatives put their values into practice.
1. Voluntary & Open Membership
Cooperatives are voluntary organizations, open to all persons able
to use the co-op’s goods & services and willing to accept the responsibilities
2. Democratic Member Control
Cooperatives are democratic organizations controlled by their members.
In general, members have equal voting rights (one member, one vote).
3. Member Economic Participation
Members contribute to and democratically control the capital of their
co-op. They receive limited compensation, if any, on capital contributed
as a condition of membership. Profits are allocated to reserves and/or
are used to benefit members in proportion to their transaction with the
4. Autonomy & Independence
Cooperatives are autonomous, self-help organizations. Democratic
control by the members must be maintained in all contracts the co-op enters
5. Education, Training & Information
Cooperatives provide education and training for their members and staff
to help them fully participate in the democratic control and development
of the cooperative.
6. Cooperation Among Cooperatives
Cooperatives serve their members most effectively and strengthen the
cooperative movement by working together through local and national groups.
7. Concern for Community
While focusing on member needs, cooperatives work for the sustainable
development of their communities.